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G LOBAL SUPPLY CHAIN FINANCE FOR U MSTANDARD DEFINITIONSFOR TECHNIQUES OFSUPPLY CHAIN FINANCEJoint product of the industrysponsoring associations
STA N DA R D D EF I N IT I ON S FO R TE C H N I Q U E S O F S U P P LY C H A I N F I N A N C ECopyright 2016BAFTEuro Banking Association (EBA)Factors Chain International (FCI)International Chamber of Commerce (ICC)International Trade and Forfaiting Association (ITFA)All rights reserved.BAFT, EBA, FCI, ICC and ITFA hold all copyright and other intellectual property rights in this collective work.Excerpts may be reproduced for non-commercial purposes, with an acknowledgement of the sources.2
G LOBA L SU P P LY C H A I N F I N A N C E FO R U MContentsTable of Figures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7Part 1: Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111.1.The establishment and work of the Global SCF Forum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111.2.The audience for this document . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121.3. A note on the legal implications of the standard market definitions . . . . . . . . . . . . . . . . . . . . . 141.4. A note on the accounting and regulatory capital treatment ofSupply Chain Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141.5. A note on Know Your Customer and Anti-Money Laundering requirements . . . . . . . . . . . . . 151.6.Acknowledgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15Part 2: Context and background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172.1.Physical and Financial Supply Chains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172.2.New patterns in trade flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172.3.Examples of definitional frameworks for SCF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20Part 3: The standard definitions of SCF techniques . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 223.1.Approach and scope . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 223.2.Master definition of Supply Chain Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 243.3.The SCF technique definitions developed by the Global SCF Forum . . . . . . . . . . . . . . . . . . . . 253.4.Receivables Purchase category . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 273.4.1.Receivables Discounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 283.4.2. Forfaiting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 343.4.3. Factoring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 393.4.4. Factoring Variations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 433.4.5. Payables Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 453.5.Loan or Advance-based SCF techniques . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 493.5.1.Loan or Advance against receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 493.5.2. Distributor Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 523.5.3. Loan or Advance against Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 563.5.4. Pre-shipment Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 603
STA N DA R D D EF I N IT I ON S FO R TE C H N I Q U E S O F S U P P LY C H A I N F I N A N C E3.6.Bank Payment Obligation (BPO) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 633.6. 1BPO as an enabling framework for SCF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 673.7.Synopsis of SCF techniques . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 713.8.Asset or risk distribution techniques used by finance providers . . . . . . . . . . . . . . . . . . . . . . . . 733.9.Supply Chain Finance: client centric view . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73Part 4: Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74Part 5: Appendices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92Appendix A: Sources and Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92A.1.Capturing existing SCF definitions and initiatives as a starting point . . . . . . . . . . . . . . . . 92A.2.Specific steps taken to define the SCF techniques . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93Appendix B: Physical and Financial Supply Chains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95Appendix C: List of Reviewers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96Notes4
G LOBA L SU P P LY C H A I N F I N A N C E FO R U MTable of FiguresFigure 1:Development foreign trade (exports) from 1978 until 2013.18Figure 2: Supply Chain Finance portfolio. 20Figure 3: Open account processing and financing opportunities.21Figure 4: SCF definitions: conceptual hierarchy.23Figure 5: Receivables Discounting.33Figure 6: Forfaiting. 38Figure 7: Factoring. 42Figure 8: Payables Finance. 48Figure 9: Loan or Advance against receivables.51Figure 10: Distributor Finance.55Figure 11: Loans or Advances against Inventory. 59Figure 12: Pre-shipment Finance. 62Figure 13: Establishing the baseline. 65Figure 14: Matching of trade data. 66Figure 15: Bank Payment Obligation as an enabling framework for Supply Chain Finance.675
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G LOBA L SU P P LY C H A I N F I N A N C E FO R U MExecutive SummaryThe “Standard Definitions for Techniques of Supply Chain Finance” set out in this document buildsupon several excellent initiatives and documents aiming to develop terminology related to this fastgrowing, high-value but still fairly nascent form of financing, which applies equally in support ofdomestic and international supply chains.The Global Supply Chain Finance Forum1 represents a number of industry associations withmembers around the world, and it has been a core principle of this initiative, that the activities ofthe team be collaborative, inclusive and consensus-based.The drafting effort, executed by a team of senior practitioners, has benefitted from the guidanceof an international and multi-industry Steering Group, and has actively sought a wide range ofcommentary and feedback from the market, including providers of supply chain finance solutions aswell as end-users.The intent of this initiative is to help create a consistent and common understanding about SupplyChain Finance (SCF) starting from the definition of terminology, to be followed by advocacy insupport of global adoption of the standard definitions. It is recognised that SCF propositionshave evolved at different rates and in varying directions by region and at the level of individualproviders; however, the view is that there is agreement on the clear benefits to the financial industry,regulatory authorities, clients and other stakeholders, from the development and dissemination ofstandard definitions and terminology. Further work based on the definitional framework developedin this document is likely to follow, including further standardisation and other development activity.After the introduction in Part 1, Part 2 provides context and background to the initiative. Part 3articulates the rationale, methodology and process followed by the Drafting Group in the selectionof the SCF techniques to define, and to determine the elements that ought to be included in eachdefinition. The individual techniques are then defined. The Forum has opted to deliver a documentthat provides more than a list of techniques and a set of high level definitions. The scope andextensive detail are offered with a view to the larger objective of global adoption, and in recognitionof the various audiences to which the document will be of interest. The definition of each technique(which includes an illustrative transaction flow) can stand on its own and the document includes asummary table for quick reference purposes.Numerous variations of SCF techniques and programmes exist today, and more will evolve, so thatthis document must of necessity be a ‘living document’ that will require periodic updating. Thegrowing range of SCF providers and the application of technology to SCF solutions will furtherdrive a need to keep up with market developments.Global adoption of the suggested terminology – and the corresponding benefits which suchadoption would bring – rest on advocacy which this document is intended to progress and support.We believe that such efforts should begin with this publication and recommend these standardmarket definitions for adoption.1Global SCF Forum participating organisations: The International Chamber of Commerce (ICC) Banking Commission , BAFT,the Euro Banking Association (EBA), Factors Chain International (FCI), and the International Trade and Forfaiting Association (ITFA).The International Factors Group, one of the original sponsoring associations is now integrated with FCI.7
STA N DA R D D EF I N IT I ON S FO R TE C H N I Q U E S O F S U P P LY C H A I N F I N A N C EThis first edition of the “Standard Definitions for Techniques of Supply Chain Finance” articulatesthe following ‘master’ definition for Supply Chain Finance and includes definitions for the eightidentified core techniques, as well as for the Bank Payment Obligation, which is to be understood asan enabling framework for SCF, rather than a technique.The following definition of Supply Chain Finance is intended to be used for reference throughoutthis document and is recommended as the master definition for Supply Chain Finance.Supply Chain Finance is defined as the use of financing and risk mitigation practices andtechniques to optimise the management of the working capital and liquidity invested insupply chain processes and transactions. SCF is typically applied to open account tradeand is triggered by supply chain events. Visibility of underlying trade flows by the financeprovider(s) is a necessary component of such financing arrangements which can be enabledby a technology platform.Portfolio: SCF is a portfolio of financing and risk mitigation techniques and practices thatsupport the trade and financial flows along end-to-end business supply and distributionchains, domestically as well as internationally. This is emphatically a ‘holistic’ concept thatincludes a broad range of established and evolving techniques for the provision of financeand the management of risk.Open account: SCF is usually, but not exclusively, applied to open account trade. Openaccount trade refers to trade transactions between a seller and a buyer where transactionsare not supported by any banking or documentary trade instrument issued on behalf ofthe buyer or seller. The buyer is directly responsible for meeting the payment obligationin relation to the underlying transaction. Where trading parties supply and buy goods andservices on the basis of open account terms an invoice is usually raised and the buyer payswithin an agreed time frame. Open account terms can be contrasted with trading on thebasis of cash in advance, or trading utilising instruments such as Documentary Credits, as ameans of securing payment.Parties: Parties to SCF transactions consist of buyers and sellers, which are trading andcollaborating with each other along the supply chain. As required, these parties workwith finance providers to raise finance using various SCF techniques and other forms offinance. The parties, and especially ‘anchor’ parties on account of their commercial andfinancial strength, often have objectives to improve supply chain stability, liquidity, financialperformance, risk management, and balance sheet efficiency.Event driven: Finance providers offer their services in the context of the financialrequirements triggered by purchase orders, invoices, receivables, other claims, and relatedpre-shipment and post-shipment processes along the supply chain. Consequently, SCF islargely ‘event-driven’. Each intervention (finance, risk mitigation or payment) in the financialsupply chain is driven by an event or ‘trigger’ in the physical supply chain. The developmentof advanced technologies and procedures to track and control events in the physical supplychain creates opportunities to automate the initiation of SCF interventions in the relatedfinancial supply chain.8
G LOBA L SU P P LY C H A I N F I N A N C E FO R U MEvolving and flexible: SCF is not a static concept but is an evolving set of practices using orcombining a variety of techniques; some of these are mature and others are new or ‘leadingedge’ techniques or variants of established techniques, and may also include the use oftraditional trade finance. The techniques are often used in combination with each other andwith other financial and physical supply chain services.The definitions for the individual SCF techniques and the enabling framework are set out here asfollows:1. Receivables Purchase SCF categoryReceivables Discounting is a form of Receivables Purchase, flexibly applied, in which sellers ofgoods and services sell individual or multiple receivables (represented by outstanding invoices) to afinance provider at a discount.Forfaiting is a form of Receivables Purchase, consisting of the without recourse purchase of futurepayment obligations represented by financial instruments or payment obligations (normally innegotiable or transferable form), at a discount or at face value in return for a financing charge.Factoring is a form of Receivables Purchase, in which sellers of goods and services sell theirreceivables (represented by outstanding invoices) at a discount to a finance provider (commonlyknown as the ‘factor’). A key differentiator of Factoring is that typically the finance providerbecomes responsible for managing the debtor portfolio and collecting the payment of theunderlying receivables.Payables Finance is provided through a buyer-led programme within which sellers in the buyer’ssupply chain are able to access finance by means of Receivables Purchase. The technique providesa seller of goods or services with the option of receiving the discounted value of receivables(represented by outstanding invoices) prior to their actual due date and typically at a financingcost aligned with the credit risk of the buyer. The payable continues to be due by the Buyer until itsdue date.2. Loan or Advance-based SCF categoryLoan or Advance against Receivables is financing made available to a party involved in a supplychain on the expectation of repayment from funds generated from current or future tradereceivables and is usually made against the security of such receivables, but may be unsecured.Distributor Finance is financing for a distributor of a large manufacturer to cover the holding ofgoods for re-sale and to bridge the liquidity gap until the receipt of funds from receivables followingthe sale of goods to a retailer or end-customer.Loan or Advance against Inventory is financing provided to a buyer or seller involved in a supplychain for the holding or warehousing of goods (either pre-sold, un-sold, or hedged) and overwhich the finance provider usually takes a security interest or assignment of rights and exercises ameasure of control.9
STA N DA R D D EF I N IT I ON S FO R TE C H N I Q U E S O F S U P P LY C H A I N F I N A N C EPre-shipment Finance is a loan provided by a finance provider to a seller of goods and/or servicesfor the sourcing, manufacture or conversion of raw materials or semi-finished goods into finishedgoods and/or services, which are then delivered to a buyer. A purchase order from an acceptablebuyer, or a documentary or standby letter of credit or a Bank Payment Obligation, issued on behalfof the buyer, in favour of the seller is often a key ingredient in motivating the finance, in addition tothe ability of the seller to perform under the contract with the buyer.3. Enabling frameworkPlease see Part 3.6 for a discussion of this frameworkBank Payment Obligation (BPO) is an inter-bank instrument to secure payments against thesuccessful matching of trade data. As per the Uniform Rules for Bank Payment Obligations, theBank Payment Obligation means ‘an irrevocable and independent undertaking of an ObligorBank to pay or incur a deferred payment obligation and pay at maturity a specified amount to aRecipient Bank following Submission of all Data Sets required by an Established Baseline resultingin a Data Match or an acceptance of a Data Mismatch’ (URBPO, ICC Publ. No. 750E).An illustrative summary table can be found at the end of Part 3.A full glossary of terms and expressions used is provided herein and further detail on sources andmethodology is included in Part 4.10
G LOBA L SU P P LY C H A I N F I N A N C E FO R U MPart 1: Introduction1.1.The establishment and work of the Global SCF ForumIt has been recognised by a number of leading industry associations and practitioners globally, thatthere is a need to develop, gather and disseminate standard market definitions related to SupplyChain Finance – a nascent but increasingly important dimension of the financing of domestic andinternational commerce.The expression “supply chain finance” (SCF) today covers a wide range of products, programmesand solutions in the financing of commerce, including international trade, and has been used to referto a single product, or a comprehensive range of products and programme of solutions aimed ataddressing the needs of buyers and sellers, especially when trading on open account terms, in theincreasingly complex supply chains in which they are involved.The current inconsistency in definitions, nomenclature and general language around the financingof trade linked to open account terms and to the support of global supply chains, is proving to bechallenging for buyers, sellers, finance providers, service providers and other stakeholders alike2.This issue has immediate implications for the accounting and regulatory treatment of supply chainfinance structures, and by extension, impacts market uptake and the engagement of traditional aswell as emerging providers of SCF solutions.The inconsistent– even contradictory- language currently in use is complicating advocacy effortsand diluting the effectiveness of communication aimed at fairly articulating the value propositionaround supply chain finance, at a time when it is increasingly important to domestic commercialactivity as well as to the facilitation of global trade. The purpose of this document is to help toremove the uncertainty, ambiguity and lack of clarity when terminology is used in both technicalindustry discussions and in broader conversations.Whilst the techniques of traditional trade finance such as Documentary Credits, DocumentaryCollections and Guarantees may be used in conjunction with the SCF techniques described in thisdocument, they are not extensively described or discussed because of the vast existing literatureand established practices. The exclusion of traditional trade finance should not be taken as a valuejudgment or a reflection of relative importance, and has been done for practical reasons.The Global Supply Chain Finance Forum (the Forum) was established in January 2014, as aninitiative of a number of sponsoring industry associations facilitated by the International Chamberof Commerce (ICC) Banking Commission, to address what has been recognised as a need todevelop, publish and champion a set of commonly agreed standard market definitions for SupplyChain Finance and for SCF-related techniques. Through this document the sponsoring associationsof the Forum have confirmed their support for these standard market definitions which are nowrecommended to the wider stakeholder community for adoption.The Forum is widely representative and inclusive, with bank and non-bank contributors, from fivecontinents and from the four major industry associations forming the Forum membership3. The2Global SCF Forum Drafting Group Terms of Reference 20143Global SCF Forum participating organisations: The International Chamber of Commerce (ICC) Banking Commission , BAFT,the Euro Banking Association (EBA), Factors Chain International (FCI), and the International Trade and Forfaiting Association (ITFA).The International Factors Group, one of the original sponsoring associations is now integrated with FCI.11
STA N DA R D D EF I N IT I ON S FO R TE C H N I Q U E S O F S U P P LY C H A I N F I N A N C EForum has adopted a wide-ranging consultative process to develop global alignment aroundSupply Chain Finance definitions and nomenclature.It is the hope of the Forum and its constituent sponsoring associations that this document willevolve with industry practice, serving as a practical and current guide for practitioners andinterested parties, including finance providers, their clients, regulators and investors. In that spirit,this document seeks to clarify and actively shape the evolution of SCF terminology, by identifyingand recommending a set of common globally accepted standard market definitions. The documentincludes contextual discussion, as well as specific definitions and transaction flow illustrationsrelated to each key element defined herein.The definitions that follow in Part 3 of this document are described by a single headline name,which is proposed as the standard identifying name of the SCF technique to which it refers.Commonly encountered synonyms are listed separately. The Forum believes that use of theheadline names is critical in ensuring consistency but understands that currently wide use is madeof alternative expressions. This initiative offers the opportunity for market participants to align theirproducts and services with the standard definitions, whilst retaining the freedom to differentiateand brand individual services in a fully competitive manner. Phrases such as ‘Our product X is a formof Payables Finance (ICC/GSCF definition ref. ABC)’ might become common as the terminologytakes hold.The Forum recognises that the achievement of these objectives and intentions will require ongoingadvocacy and championing, and will evolve over time: certain expressions and definitions inuse today have been in industry “vocabulary” for decades or longer, and are used in marketingcollateral, finance provider information systems, various guides and professional publications, suchthat the adoption of the recommendations reflected in this document is likely to happen in at leasttwo broad phases: adoption and agreement in principle, followed by adoption in practice. TheForum recognises that this process will require ongoing support, especially given many regional andjurisdictionally based variations. The process may in time lead to a demand for further work in areassuch as proposals for further market standards, a practical user guide for the SCF techniques, morematerial on risk and policy issues, possible infrastructure proposals and other developments for SCF.Such areas do not form part of the present initiative.It should be clearly stated that although this project involved many market competitorsworking together in a cooperative environment, the subject of discussion related purely to thestandardisation process being pursued and not to any matters of a competitive or sensitive nature.Members of the Forum were conscious of the ‘competitive environment’ and took explicit care intheir deliberations not to exceed the brief or mandate of the initiative, by making recommendationsthat could inappropriately extend into the competitive realm.1.2. The audience for this documentThe standard market definitions are intended to be of value to a variety of audiences and interestedparties, including but not limited to the following:Finance ProvidersThe definitions will support the development of the SCF market, the growth of individual providerbusinesses and effective communication with end-clients, by creating clarity and transparency asto products being offered by banks and non-banks alike. The use of standard market definitions12
G LOBA L SU P P LY C H A I N F I N A N C E FO R U Mwill also facilitate dialogue between important internal stakeholders within institutions includingbusiness development, senior management, risk, compliance and product management.Corporate, commercial and SME clientsThe terminology will greatly enhance the ability of clients to understand, compare and selectoptimal solutions to their supply chain finance needs and consider the offerings as an attractivealternative to other financing models. Clients will be able to weigh alternatives, their advantagesand disadvantages, and engage in a clearer and more relevant dialogue with finance providers andother supporting communities.InvestorsSecondary market investors are expressing increasing interest in SCF given the inherentattractiveness of these mainly short term, self-liquidating and trade-related assets and transactions.Investors need clarity related to the nature of the structures and portfolios in which they mightinvest, and reassurance as to the risk characteristics, safety and regulatory integrity of thetransactions. This includes details on security and transfer of rights, and the source of repayment.The definitions will permit finance providers’ asset distribution teams and their trade associations todeliver clear messages to investors.It should be stressed that the provided definitions focus mainly on a description of the techniques,any security taken and the parties that become obligated towards a finance provider. Giventhe variety of transactional structures which may arise under the described techniques, financeproviders and investors will need to undertake a further level of analysis in relation to an individualtransaction to determine the overall level of riskiness, the primary source of repayment, the degreeto which perfection of security has been completed and is effective, and th
supply chain is driven by an event or 'trigger' in the physical supply chain. The development of advanced technologies and procedures to track and control events in the physical supply chain creates opportunities to automate the initiation of SCF interventions in the related financial supply chain.
